Biden and Democrats detail plans to raise taxes on multinational firms

The Biden administration and top Democrats in Congress began detailing plans for significant changes to how the United States and other countries tax multinational corporations as they look for ways to raise revenues and finance President Joe Biden’s $2 trillion infrastructure proposal.

On Monday, Treasury Secretary Janet Yellen threw her support behind an international effort to create a global minimum tax that would apply to multinational corporations, regardless of where they locate their headquarters. Such a global tax, she said, could help prevent a “race to the bottom” in which countries cut their tax rates in order to entice companies to move headquarters and profits across borders.

“Together, we can use a global minimum tax to make sure the global economy thrives based on a more level playing field in the taxation of multinational corporations,” she said. The effort is aimed at “making sure that governments have stable tax systems that raise sufficient revenue to invest in essential public goods and respond to crises, and that all citizens fairly share the burden of financing government.”

At the same time, Democrats in Congress released their own proposal to add teeth to the de facto minimum tax that the United States already imposes on income earned abroad — one that would apply to American multinational companies regardless of what the rest of the world does. The proposal could raise as much as $1 trillion over the next 15 years from large companies by requiring that they pay higher taxes on profits they earn overseas, according to analyses of similar plans.

Yellen’s support for a global minimum tax could help catalyse an agreement being worked out through the Organization for Economic Cooperation and Development, which seeks to reduce companies’ practice of booking profits in low-tax “haven” countries to avoid higher tax bills elsewhere. Negotiators are discussing a range of possibilities for such a plan, but they have not settled on several crucial details, including the rate of the minimum tax.

The focus on raising taxes for large companies comes as the Biden administration begins its push to sell a $2 trillion infrastructure plan and finance it with higher taxes. Biden’s proposal includes raising the US corporate tax rate to 28% from 21% and a variety of changes to international tax law, all meant to force companies to pay more to the Treasury after a plunge in corporate tax revenues spurred by President Donald Trump’s signature 2017 tax cuts.

Democrats and White House officials say that their goal is to ensure companies pay their fair share and that they do not move jobs and profits abroad to avoid paying taxes in the United States.

But some tax experts, along with large business lobbying groups, say the proposals could hobble US corporations on the global stage by forcing them to pay significantly higher tax rates than their competitors pay. That could be true even if global negotiators eventually agree to a worldwide minimum tax — because that tax rate could still be lower than what companies pay in the United States.

If the Democratic plans succeed and Yellen and her global counterparts reach agreement, “there could be a cogent international tax system” with some effective incentives for investments in the United States, said Danielle Rolfes, a former international tax counsel for the Treasury Department in the Obama administration who is now a leader of KPMG’s international tax practice in Washington.

But, she said, “I would be concerned, if the rates get too high, that the US might have competitiveness issues.”

Sen. Patrick J. Toomey, R-Pa., said Yellen’s call for a global minimum tax was an admission that Biden’s plan to raise the corporate tax rate to 28% would make US companies less competitive.

“This is why Secretary Yellen is imploring other developed countries to punish their workers and businesses with their own tax increases,” Toomey said in a statement. “‘Race to the bottom’ is the way the Biden administration describes competition among developed countries to get to a tax code that attracts investment and maximizes growth.”

Biden dismissed that view Monday, saying US companies could afford to pay a higher tax rate given many paid no taxes over the past several years.

“You have 51 or 52 corporations of the Fortune 500 that haven’t paid a single penny in taxes for three years,” he said. “Come on, man. Let’s get real.”

The proposal would increase the rate of the 2017 minimum tax and change how it is applied to income that corporations earn in various countries overseas, effectively forcing many companies to pay the tax on more of their income, while offering new targeted tax relief linked to domestic investments.

The Senate plan comes from Sen. Ron Wyden, D-Ore., who is in charge of writing tax legislation as chairman of the Finance Committee, and two Democratic colleagues: Sen. Sherrod Brown of Ohio and Sen. Mark Warner of Virginia.

But Republicans, the leading business lobbying group and some tax experts panned the proposal and defended the Trump system as one that worked.

The 2017 law “worked to improve a system that no one felt was working and struck a balance between the need for companies to be able to compete in the global economy while protecting the US tax base,” said Caroline Harris, the vice president of tax policy at the US Chamber of Commerce. “Today’s proposal to increase international taxes threatens to move us to a system even worse than where we started, to the detriment of economic growth, competitiveness and job creation.”

Tax experts expressed similar concerns about enforcing the kind of global minimum tax Yellen is calling for and about what that might mean for American companies.

“It’s administratively impossible to execute and it requires all countries in the world to hold hands,” said Peter Barnes, a lawyer at the tax firm Caplin and Drysdale who was previously a senior international tax counsel for General Electric. “Unless they can get 90% of the world’s countries to adopt it, countries will view exempting themselves from the system as a great way to create a potentially significant competitive advantage.”